Monday, June 09, 2008

The first time in my trading career I'm going through such a consolidation and I'm not standing with my back at the cliff, where one misstep will throw me in the broken account chasm. And by chance I followed a link to Henry Carstens. In his "Introduction to Testing Trading Ideas" article I found something extremely valuable:

A formula to calculate the Minimum Margin you should apply to all your trades.

You need to know the maximum loss sustained in one individual trade and your Win% and Loss% numbers. I've taken the numbers for 2008, but that's up to you of course. Just make sure, that the number of trades done within the time selected is high enough to give an accurate picture of your trading.

Minimum Margin = (Largest Loss) / (((( 1 + (W% / L%))*W%) - 1) / (W% / L%))

My largest loss this year so far was 5812\$, my Win% rate is 63% and my Loss% rate is 12%, the remainder are breakeven trades. I made 377 trades which is high enough to give me statistically meaningful results for my Win% and Loss% rate.

So my Minimum Margin calculates as:
MM = 5812\$ / (((( 1 + (63%/12%))*63%)-1)/(63%/12%) = 10347\$

I always knew, I should not use less than 10k\$ / contract traded and I did so for 3 months, but I violated that rule during the last 4 weeks, when I tried to convince myself to increase size. I did not feel comfortable, but I couldn't put my finger on it, telling myself that I'm just anxious to increase size. Now I have something measurable, something which tells me when it is ok to increase size and when I should still wait.

Anonymous said...

Hallo,

Maybe you find interesting this:

Rgs,

Francisco aus Baires

markus said...

Chris,

does this mean your largest loss on one trade was 5812 USD?
In my own trading analysis I have only winners or losers because I have to pay commission. Therefore a break-even trade actually never shows up (even if it would be possible if gains cover exatly commissions).
Do you think about correalations if you trade various instruments at the same time?

Cheers,
Markus

Hi Markus,

that's correct 25% of my trades are breakeven. But it seems we have a different notion about breakeven trades. Any trade which I close at +1 tick or +2 ticks is considered a breakeven trade. Anything below is a loss, anything above is considered a winning trade.
And yes, my highest loss this year was 5812 USD. It wasn't a good day that day, but I think I have said that in the past: You can't expect to transition to higher profits without taking higher risks. And from time to time stupid decisions come together and you are left without a big chunk of your account.
Still it has payed off for me and fortunatly these extreme losses are not common place or I would be out of business very fast:-)
Best regards,

Chris

markus said...

Chris,

thanks for your reply, but I am not sure if I got it: It was 5812 USD lost on one trade or was it a one day loss (or both).
Anyway it is a huge amount in percentage terms if I guess right (35% -50%?) For me it would be much to much even for one year. It seems you rival Livermore a bit ;-)
Risk mgmt. includes position sizing and it is very important for consistent and growing success. I tried this tool last year and it presented me with some nice insights (I think I mentioned it a while earlier):

What helped me a lot in becoming cosistently profitable was specializing in 2 correlating markets with one flexible method over 4 timeframes and a strict and proper risk mgmt.

Cheers,

Markus